tag:blogger.com,1999:blog-8152901575140311047.post5844889000267289691..comments2024-03-29T07:41:47.433-04:00Comments on Musings on Markets: Stock-based Employee Compensation: Value and Pricing EffectsAswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger30125tag:blogger.com,1999:blog-8152901575140311047.post-64787427126857699092016-06-15T11:41:03.725-04:002016-06-15T11:41:03.725-04:00Dear Professor,
My concern is that your explanati...Dear Professor,<br /><br />My concern is that your explanation of why stock-based compensation is an expense is the same old story and, as the FASB explained it way back when, it is based on tautological reasoning. But, even if we assume that it is a proper expense, your explanation of why it is not the same as depreciation or amortization is quite weak - and you conclude it is different because you say it is. Still, after all that, your argument about why it should not be added back to arrive at adjusted EBITDA is focused on that metric as a performance measure, rather than, what it once was (and more appropriately so), a measure of liquidity. But, once again, even after all that, it is a non-cash expense, despite your tautological contention that it is not.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-32660129347477198892016-02-17T09:27:21.209-05:002016-02-17T09:27:21.209-05:00Hello Professor,
thanks for the article.
One qu...Hello Professor,<br /><br />thanks for the article. <br /><br />One question. Let s assume that the company reports under IFRS 2 and let s assume that the FV at grant is allocated over the vesting period. Let s assume the Valuation Date is during the vesting period, i.e. the net income includes the pro-rata part of the option expenses. If I add the FV of the options outstanding to the Market cap in order to compute a P/E multiple, isn't there some inconsistency between numerator and denominator? Because the numerator does not account for the dilution effect of the option, while we consider some expenses in the NI.<br /><br />I look forward to hearing from you.<br /><br />Best regards.<br /><br />GianlucaGiannoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-61462336714359388102016-01-27T10:56:34.453-05:002016-01-27T10:56:34.453-05:00Hello,
would it also be feasible (as a shortcut) ...Hello,<br /><br />would it also be feasible (as a shortcut) to calculate the "real" PE Ratio not by adding the value of outstanding Options to market cap in the nominator, but rather to use Share Price / EPS calculating EPS based on diluted Shares at the end of the Prior year (in order not to double Count recently awarded share Options)?<br /><br />Obviously that's not precise but Option valuation models are not perfect either and data for precise calculation is neither... <br /><br />ThanksAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-66746748434358630152015-07-07T18:10:40.726-04:002015-07-07T18:10:40.726-04:00I work in finance and have been quite puzzled by t...I work in finance and have been quite puzzled by the popular practice of adding back stock-based compensation to EBIT and EBITDA - indeed, if you browse online portals such as Wall Street Oasis, it is taken as a logical necessity to do so. This never made sense to me, and it is gratifying to see Professor Damodaran explain why so. <br /><br />However, the main reason I stumbled across this page is because of questions I've been trying to answer while reading Piketty's book - Capitalism in the 21st century. One of the issues Piketty discusses is the rise of the "supermanager" and how incomes at the top of corporate America have risen so drastically in the last 30 years.<br /><br />My intuitive thesis is that stock-based compensation may have a large role to play with this phenomenon and I've been scouring the web to see if anyone has attempted to look for positive correlation between the rise in stock-based comp and overall comp to the "supermanagers." What I think could be a particularly interesting phenomenon is that if companies, analysts and the financial world in general are looking at adjusted earnings that exclude stock-based compensation, this only creates a circularity whereby corporate executives can continue to take home larger compensation packages without affecting their "adjusted" bottom lines.Wandering Bearnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-67262862900480718132015-06-12T09:16:00.341-04:002015-06-12T09:16:00.341-04:00It is not like the difference between EPS and Dilu...It is not like the difference between EPS and Diluted EPS is hidden from the public. Every company posts EPS and Diluted EPS at the bottom of their statement of operations. I am not sure if you are trying to explain the difference between the two?<br /><br />Companies and investors focus on adjusted data because they are not focused on earnings but on growth. At Twitter revenue growth is based on its ability to attract MAUs and monetize them.<br /><br />Personally I like to look at earnings-R&D for my adjustments. Last Fiscal year they would have made about $0.252. Still expensive but they are growing revenue at about 100% per year so I do not have a problem paying $37. Jeremy Kruidhttps://www.blogger.com/profile/17492412586439642273noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-36528420653570866032015-05-12T17:27:17.326-04:002015-05-12T17:27:17.326-04:00Professor,
By and large I agree with your discuss...Professor,<br /><br />By and large I agree with your discussions on the accounting treatment of options, but I disagree on your views on SBC that are settled in shares. Specifically, I actually agree with the following argument you cited:<br /><br />"The other explanation is that the adjusted net income is being divided by the fully diluted number of shares outstanding, which includes the shares that are being offered as compensation."<br /><br />Here is the basic rationale. Yes, giving free shares to employees is an expense, but having it affecting both the numerator (i.e. charging to income as expenses) and the denominator through higher share count is double counting, double punishment really. The economic reality is, by suddenly have a higher share count should not change the total amount of reward - net income; the only thing should change is the number of shares that participate in the sharing of that reward. That is, net income doesn't change, but EPS does through dilution. Recently I chatted with a friend about this same topic on Google. Below is what I had to say. Please comment.<br /><br />"I want to make a few more points just to clarify. Let me know if you feel bored by this topic, and I'll stop. 1. I'm not assuming the 4 billion SBC all came from 2014. If Google stock grants typically take 5 years to vest, I'm assuming the 4 billion is the collective effect of the portions that were granted during the last 5 years and vested in 2014 and got charged to 2014. Collectively those portions have resulted in 1-2% dilution in a year. 2. The point I have been trying to make has less to do with Google in particular, but more to do with the inappropriateness of the accounting standards in charging SBC expenses to income. For stock options or stock appreciation rights that are expected to settle in cash and do not result in shares being issued, I agree they should be expensed. Otherwise, for all others that are expected to be settled in shares, they shouldn't be charged to income as expenses since share dilution will take care of it in the earnings per share calculation. 3. To make my point, let me use a simplified example. Let's assume we are looking at a company with 100 shares outstanding trading at $10 per share. Further assume it has 10 employees and $100 in net income without any SBC. For simplicity let's also assume the company's tax rate is 0. So it earns $1 a share and trades at PE of 10. Now imagine what happens to its reported net income and earnings per share if the company decides to give every employee 5 free shares, only one being vested in the current year, and the rest being vested in successive years. GAAP accounting requires the company to expense the 10 vested shares at market value for the current year (1x10=10, with 1 share vested for each of the 10 employees), leading to a net income of 100 - 10x10 = 0. That says the company has no income, or equivalently, its management is giving the entire company away! But that's absurd. In reality it's only giving away 10/(100+10)=9% of the company for the current year. Instead of reporting $0 per share in earnings, it should have reported 100/(100+10) = 0.91 dollars in earnings per share after fairly accounting for dilution. After all, the economic reality is that there are now 110 shares for the current year sharing the same $100 in total income. Giving away free shares should only affect share count and earnings per share, not net income, absent taxes."Anonymoushttps://www.blogger.com/profile/11660120404891486035noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-40345979365776161462015-05-05T12:39:47.437-04:002015-05-05T12:39:47.437-04:00Professor, I work at growth fund and struggle with...Professor, I work at growth fund and struggle with SBC everyday. Thanks for your detailed entry. <br /><br />The consistency argument (adjusted net income is being divided by the fully diluted number of shares outstanding) does not hold up arithmatically...Adding same or similary number (SBC and fully diluted share count) to the numberator and denominator of a fraction breaks the equivalency...its just plain arithmatics.Anonymoushttps://www.blogger.com/profile/14698220247606624577noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-67715039480684210782014-10-02T20:52:42.841-04:002014-10-02T20:52:42.841-04:00But actually you are double counting it. To use pr...But actually you are double counting it. To use prof. Damodaran example: if we don't add back stock-based compensations in all three cases - company A,B,C would have same adjusted net income - $10 million. But with different number of diluted shares. which would give different EPS and P/E. In other words those that appear cheaper would appear more expensive.<br />Now imagine company B and C would be doing this every year. Company B would have 12 million shares , next year 14, after that 16, 18 and 20. With same GAAP earnings as company A and without adding stock based compensations it would appear twice as expensive as company A on P/E basis.Robnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-25615849328283311992014-09-10T22:56:26.788-04:002014-09-10T22:56:26.788-04:00Great article, the way I looked at it, it's in...Great article, the way I looked at it, it's inflating the Contributed Surplus (Shareholder Equities) and deteriorating RE each year during the Vesting Period. <br /><br />When the options get exercised, Dr. small amount of cash and Cr. a much larger amount on Common Stock, whereas the deteriorated RE will not be recovered. <br /><br />By only looking at net income + stock-based compensation, one is ignoring the fact that deterioration happening in RE... End of the day, although Common Share increased by market value of the options, but the Assets side increased much less (Excise price of the option) per share value decreases...........if not excluding Stock-based compensation, one is assuming RE stays the same, those options will be exercised at market priceAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-62153489714744797932014-06-19T07:42:51.820-04:002014-06-19T07:42:51.820-04:00Perfect Money Pool 1500% daily for 5 days
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I'm still struggling how after y...Hi Professor,<br />I'm still struggling how after your adjustments, that Company A, B, and C would all come out with a PE of 10 with the double counting. What is the flaw of simply using GAAP income over current shares outstanding (not counting dilution) because from the table above, they will all show PE of 10 if done this way. Thanks!Eddienoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-7121454566553932102014-03-16T21:38:45.536-04:002014-03-16T21:38:45.536-04:00I want to expand upon what 'End Game' said...I want to expand upon what 'End Game' said. We think of technology companies whenever we hear share-based compensation, however it is more prevalent we think.<br /><br />For example,I was looking at McDonald's numbers and I found this shocking fact. Over the past 10 years McDonald's earned about 41 Billion in profits, but take a guess on how much the Shareholder's equity has increased? just 1.8 Billion. In other words, just 4% of the Net Income was reinvested into the equity. About 19.6 Billion or 48% was paid as dividends but the remaining 48% was spent on repurchases. But the share count came down only by 268 Million.<br /><br />We have a system where the companies get away with paying compensations as stock options but also tout stock repurchases as a shareholder friendly measure. <br /><br />This post is a good start<br />Prabhu "Value Investor" Sivakumarhttps://www.blogger.com/profile/17741023695328112769noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-13249351682432640242014-02-26T02:38:08.817-05:002014-02-26T02:38:08.817-05:00If the employee compensation is based on stock tha...If the employee compensation is based on stock than it should be well calculated with each value and pricing effects.Stock Trading Tipshttp://blog.epicresearch.co/noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-90513303936675415542014-02-21T23:42:48.296-05:002014-02-21T23:42:48.296-05:00This is in large part driven by IB tech analysts w...This is in large part driven by IB tech analysts who frequently use multiple valuations using P/CFOx. Options boost CFFO, so most tech companies do this (e.g. N, CRM [insert your favorite tech company here]). Just look at the trend of [options expense]/ CFFO.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-22751703571170648502014-02-18T13:04:03.723-05:002014-02-18T13:04:03.723-05:00The idea sounds great but I do not think that payi...The idea sounds great but I do not think that paying someone in the form of stock is such a good idea.PENNY STOCK INVESTMENTShttp://www.manhattancalumet.comnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-56308492971435394352014-02-17T03:27:58.703-05:002014-02-17T03:27:58.703-05:00This is very good Post. I enjoy to when i read it....This is very good Post. I enjoy to when i read it. We provide Share market Tips, which is help to make pure capital.<br /><a href="http://www.capitalstars.com/bullionpremium.php" rel="nofollow">Share market Tips</a>cherstrSimran Shahhttps://www.blogger.com/profile/07370783388451703047noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-49264765374371194542014-02-16T20:50:27.567-05:002014-02-16T20:50:27.567-05:00Is it reasonable to view stock based compensation ...Is it reasonable to view stock based compensation as a type of capital? And if it is, how would it affect the discount rate? Presumably it would increase the discount rate as the required return for stock options should be much higher then plain equity? I guess this should have more relevance for tech startups as they are like issuing stock options so much...Hinhttps://www.blogger.com/profile/12991953220776938357noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-25407846109595587602014-02-16T13:55:40.857-05:002014-02-16T13:55:40.857-05:00I'm sorry for the long post, but I don't s...I'm sorry for the long post, but I don't see anyone talking about this, and if you could at some point, it would be of great service: There is a problem with the combination of stock buybacks and executive compensation: companies are turning 100% of operating cash flow + debt to reduce their number of shares outstanding. Then their compensation targets are dubiously solely based on EPS growth and share price growth. These can be hit if you're buying 15 to 20 percent of shares outstanding annually. Given that the firms know the extreme buyback greatly increases their odds of hitting targets, they are essentially undervaluing the options, and I believe regulators can look at this and decide they undervalued knowingly. When these are executed, the company gets a cash flow from the IRS, sometimes the full accounting cost of compensation is recovered. Furthermore the SEC's opinion is that firms do not have to show all of their shares on the balance sheet, not even in treasury shares. They do not have to disclose them anywhere. They can, and do, have them in plans that are for future issuance for compensation that are not disclosed on the books in any obvious and clear way, but when you do the hard work and compare what went where in their foot notes, you can start to figure out that at some firms it starts to look more like an effort to obfuscate the link between their buyback operations and the executive compensation. As long as companies have a proper plan, they have safe harbor from being accused of manipulating their share price, that happened in 2003, repurchase programs exploded after that. I'll stop there. End Gamehttps://www.blogger.com/profile/18315547296412729706noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-69234342452110367342014-02-14T11:53:37.595-05:002014-02-14T11:53:37.595-05:00"Many equity research analysts seem to think ..."Many equity research analysts seem to think so, but then again, their judgment on a number of fundamental valuation issues remains questionable"<br /><br />Oooh burn... send him to the ICU!<br /><br />But in all seriousness, you should do a post on those other questionable valuation judgments.Anonymousnoreply@blogger.com